Instead of one operating balance sheet, Singapore's prudent approach breaks the Budget into three chunks: the primary balance, the basic balance and the overall balance.
By Chia Ngee Choon, Published The Straits Times, 3 Mar 2018
Budget 2018 is consistent with the "Singapore way", namely being sustainable, pro-active and forward looking.
The "Singapore way" to ensure fiscal sustainability is to monitor our finances over both the near term and long term. This departs from conventional budgetary accounting laid out in the International Monetary Fund's (IMF) Government Finance Statistics, a point picked up by some on social media.
In the IMF's accounting standards, emphasis is placed on a single headline fiscal indicator - "gross operating surplus". This surplus is obtained by taking total revenue minus total expenditure and reflects the total change in government net worth in a year.
The total revenue includes all government receipts, tax and non-tax revenue and capital receipts. In Singapore's context, the latter would have included sales of land and the returns and earnings of investments from Singapore's reserves.
Under Singapore's Constitution, the Singapore Budget Statement shows only revenues that the Government is allowed to spend. Land sales revenue is thus excluded in the Budget Statement. Land sales revenues that are invested together with other returns and earnings from reserves are reflected in the Budget Statement as Net Investment Returns Contribution.
Instead of the IMF standard of calculating surplus, Singapore uses three different measures of fiscal balances: the primary budget balance, basic budget balance and overall budget balance. This is a uniquely Singapore way to track fiscal positions to meet its near-term and long-term needs.
PRIMARY BUDGET BALANCE
First, primary budget refers to operating revenue minus total expenditure. Almost 95 per cent of the operating revenue comes from taxes and fees and charges. About 31 per cent of the operating revenue comes from income taxes on individuals, companies and statutory boards. Another 30 per cent comes from consumption-related taxes (goods and services tax or GST, custom and excise, motor vehicle taxes and certificate of entitlement or COE premiums). The remaining operating revenue comes from property taxes, stamp duties, betting taxes and other taxes.
Operating revenue collected is to fund total expenditure for the fiscal year. Reflecting the Government's ability to meet total expenditure through operating revenue, it shows the near-term fiscal strength.
Since operating revenue excludes revenue generated from reserves and land sales, it does not reflect full fiscal capacity. The amount of operating revenue generated tends to be pro-cyclical, depending on business cycles and market conditions.
The primary budget balance was negative for FY2015 and FY2016. Budget 2017 estimated a negative primary balance as well. The estimated deficit was $5.62 billion.
By Chia Ngee Choon, Published The Straits Times, 3 Mar 2018
The "Singapore way" to ensure fiscal sustainability is to monitor our finances over both the near term and long term. This departs from conventional budgetary accounting laid out in the International Monetary Fund's (IMF) Government Finance Statistics, a point picked up by some on social media.
In the IMF's accounting standards, emphasis is placed on a single headline fiscal indicator - "gross operating surplus". This surplus is obtained by taking total revenue minus total expenditure and reflects the total change in government net worth in a year.
The total revenue includes all government receipts, tax and non-tax revenue and capital receipts. In Singapore's context, the latter would have included sales of land and the returns and earnings of investments from Singapore's reserves.
Under Singapore's Constitution, the Singapore Budget Statement shows only revenues that the Government is allowed to spend. Land sales revenue is thus excluded in the Budget Statement. Land sales revenues that are invested together with other returns and earnings from reserves are reflected in the Budget Statement as Net Investment Returns Contribution.
Instead of the IMF standard of calculating surplus, Singapore uses three different measures of fiscal balances: the primary budget balance, basic budget balance and overall budget balance. This is a uniquely Singapore way to track fiscal positions to meet its near-term and long-term needs.
PRIMARY BUDGET BALANCE
First, primary budget refers to operating revenue minus total expenditure. Almost 95 per cent of the operating revenue comes from taxes and fees and charges. About 31 per cent of the operating revenue comes from income taxes on individuals, companies and statutory boards. Another 30 per cent comes from consumption-related taxes (goods and services tax or GST, custom and excise, motor vehicle taxes and certificate of entitlement or COE premiums). The remaining operating revenue comes from property taxes, stamp duties, betting taxes and other taxes.
Operating revenue collected is to fund total expenditure for the fiscal year. Reflecting the Government's ability to meet total expenditure through operating revenue, it shows the near-term fiscal strength.
Since operating revenue excludes revenue generated from reserves and land sales, it does not reflect full fiscal capacity. The amount of operating revenue generated tends to be pro-cyclical, depending on business cycles and market conditions.
The primary budget balance was negative for FY2015 and FY2016. Budget 2017 estimated a negative primary balance as well. The estimated deficit was $5.62 billion.
In actual fact, the primary budget resulted in a surplus of $1.24 billion after revision in this year's Budget. The resultant "poor" fiscal marksmanship came about because of the exceptional $4.6 billion contribution from the Monetary Authority of Singapore (MAS) compared with $300 million predicted last year. For MAS, fluctuations in the currency and investment market have worked in its favour. Additionally, a buoyant property market resulted in higher than expected stamp duty collected.
Finance Minister Heng Swee Keat, however, urged Singaporeans "not to expect this structural surplus to occur every year". Structural surplus happens when the revenue generated during the cyclical peak exceeds the long-term average. However, during a cyclical trough, when revenue falls short of the long-term average, a "structural deficit" can happen.
It is all good for Budget 2018. The actual revised operating revenue can fully meet total government spending in 2017, with a positive primary balance. The surplus is shared with all adult Singaporeans in SG Bonus as a special transfer of $100 to $300, and a substantial amount of $5 billion is put into a rail infrastructure fund.
To sum up: For the primary balance, for Budget 2017, the estimated deficit was $5.62 billion, but the actual Budget ended with a surplus of $1.24 billion.
For Budget 2018, there is an estimated deficit of $7.34 billion.
BASIC BALANCE
Next, basic balance, which is obtained by deducting government special transfers from the primary balance. In other words, basic balance is the primary balance minus special transfers.
In the primary budget, the Government's expenditure on special transfers, also commonly known as income transfers, is not taken into account. Such special transfer items are usually funds given by the Government for social protection, income redistribution or other targeted economic objectives.
For example, there were two main government transfers in the FY2017 Budget - the Productivity and Innovation Credit to spur productivity at $480 million, and the Wage Credit Scheme to share the cost of wage increases with employers at $830 million.
The SG Bonus as announced in Budget 2018 will be included in the basic balance under special transfers.
For Budget 2017, the primary balance was estimated to be a deficit of $8.19 billion but ended at a smaller deficit of $990 million. For Budget 2018, the primary balance deficit is estimated at $9.16 billion.
OVERALL BALANCE
Singapore's approach to fiscal planning means that revenue from reserves is not included in the primary or basic balance. Instead, it is added only to the overall balance.
This overall balance also takes into account expenditure for long-term social and economic investments, often via long-term endowment funds where money is set aside upfront and returns from the funds are used to fund social or infrastructure programmes.
Expenditure items in this account highlight the Singaporean way to pre-fund large anticipated spending in the future through specific endowment and trust funds. For endowment funds, only income generated from the funds' principal amount is used. For trust funds, the income generated and a portion of the principal can be drawn down. This is an innovative way to meet anticipated future or long-term needs while ensuring sustainability over the long term.
The overall balance is derived after adding revenue generated from reserves, and deducting expenditures earmarked for long-term social and economic investments set aside in these endowment or trust funds. For example, top-ups to endowment and trust funds amount to $4.01 billion in 2017. The estimated top-ups for 2018 are $7.3 billion.
During each budget cycle, the Finance Minister will commit resources to top up existing funds and inject capital into new funds to meet specific needs. Pioneers and Singaporeans will remember Budget 2014, when a whopping $8 billion Pioneer Generation Fund (PGF) was set up by then Finance Minister Tharman Shanmugaratnam to meet the healthcare needs of the pioneer generation.
In FY2018, there is a top-up of $2 billion to the GST Voucher Fund. The return from the fund will be redistributed as GST vouchers to redress the regressivity of the impending GST increase. Budget 2018 also sees a new $5 billion Rail Infrastructure Fund set up to pre-fund infrastructure spending. This will be the second largest one-time capital injection for economic development, trailing only the PGF.
It is all good for Budget 2018. The actual revised operating revenue can fully meet total government spending in 2017, with a positive primary balance. The surplus is shared with all adult Singaporeans in SG Bonus as a special transfer of $100 to $300, and a substantial amount of $5 billion is put into a rail infrastructure fund.
To sum up: For the primary balance, for Budget 2017, the estimated deficit was $5.62 billion, but the actual Budget ended with a surplus of $1.24 billion.
For Budget 2018, there is an estimated deficit of $7.34 billion.
BASIC BALANCE
Next, basic balance, which is obtained by deducting government special transfers from the primary balance. In other words, basic balance is the primary balance minus special transfers.
In the primary budget, the Government's expenditure on special transfers, also commonly known as income transfers, is not taken into account. Such special transfer items are usually funds given by the Government for social protection, income redistribution or other targeted economic objectives.
For example, there were two main government transfers in the FY2017 Budget - the Productivity and Innovation Credit to spur productivity at $480 million, and the Wage Credit Scheme to share the cost of wage increases with employers at $830 million.
The SG Bonus as announced in Budget 2018 will be included in the basic balance under special transfers.
For Budget 2017, the primary balance was estimated to be a deficit of $8.19 billion but ended at a smaller deficit of $990 million. For Budget 2018, the primary balance deficit is estimated at $9.16 billion.
OVERALL BALANCE
Singapore's approach to fiscal planning means that revenue from reserves is not included in the primary or basic balance. Instead, it is added only to the overall balance.
This overall balance also takes into account expenditure for long-term social and economic investments, often via long-term endowment funds where money is set aside upfront and returns from the funds are used to fund social or infrastructure programmes.
Expenditure items in this account highlight the Singaporean way to pre-fund large anticipated spending in the future through specific endowment and trust funds. For endowment funds, only income generated from the funds' principal amount is used. For trust funds, the income generated and a portion of the principal can be drawn down. This is an innovative way to meet anticipated future or long-term needs while ensuring sustainability over the long term.
The overall balance is derived after adding revenue generated from reserves, and deducting expenditures earmarked for long-term social and economic investments set aside in these endowment or trust funds. For example, top-ups to endowment and trust funds amount to $4.01 billion in 2017. The estimated top-ups for 2018 are $7.3 billion.
During each budget cycle, the Finance Minister will commit resources to top up existing funds and inject capital into new funds to meet specific needs. Pioneers and Singaporeans will remember Budget 2014, when a whopping $8 billion Pioneer Generation Fund (PGF) was set up by then Finance Minister Tharman Shanmugaratnam to meet the healthcare needs of the pioneer generation.
In FY2018, there is a top-up of $2 billion to the GST Voucher Fund. The return from the fund will be redistributed as GST vouchers to redress the regressivity of the impending GST increase. Budget 2018 also sees a new $5 billion Rail Infrastructure Fund set up to pre-fund infrastructure spending. This will be the second largest one-time capital injection for economic development, trailing only the PGF.
The one-line revenue component in the overall balance is Net Investment Returns Contribution (NIRC). The amount of spendable returns from reserves has been a subject of much debate. Now, up to 50 per cent of expected long-term returns from the reserves, or NIRC, is included in the annual budget. The Government maintains that this strikes a balance between the twin needs of growing the reserves and maintaining inter-generational equity, since the reserves were built up by past taxpayers.
One thing is sure, the presence of the NIRC has enabled the Finance Minister to commit to longer, larger and lumpy social and economic investment, in a way many other finance ministers would envy.
For FY2017, adding $14.61 billion from NIRC to the basic balance and subtracting the top-ups to funds at $4.01 billion results in a $9.6 billion overall budget balance, which is about 2.1 per cent of gross domestic product. For Budget 2018, the estimated overall deficit is $610 million. Using the IMF standard of calculating gross operating balance, it will be a surplus.
Singapore's approach to budgeting may be considered too conservative, but given the twin challenges of maintaining fiscal sustainability and staying tax competitive in the midst of an ageing population, it is probably prudent to continue to be fiscally conservative.
While Budget 2018 continues to adhere to a philosophy of fiscal prudence and sustainability, it also raises Singaporeans' awareness of upcoming higher future spending on health, housing and infrastructure and warning Singaporeans of an upcoming GST hike - at least three years ahead, yet another "Singapore way".
Professor Chia Ngee Choon is deputy head, department of economics, National University of Singapore (NUS). She is the director of Scape (Singapore Centre of Applied and Policy Economics) and co-director of the Next Age Institute at NUS.
Singapore and Hong Kong: Two forward-looking Budgets with a difference
Singapore raised taxes, while Hong Kong did not. Without an ah ye (grandfather) to lean on, sovereign Singapore has to pay its own way in the world, such as in defence and foreign affairs.
By Ker Sin Tze For The Straits Times, 7 Mar 2018
Singapore unveiled its Budget on Feb 19, and Hong Kong tabled its Budget for debate on Feb 28.
Their economies are similar in terms of size, growth rate and structure. Both economies have gross domestic product (GDP) of about US$300 billion (S$396 billion), and growth rates are 3.6 per cent for Singapore and 3.8 per cent for Hong Kong for the financial year 2017-18 (FY 2017). The services industry accounts for 70 per cent of GDP in both cities.
The two Budgets both generated surpluses. In FY 2017, the Singapore Budget produced a surplus of $9.61 billion, while Hong Kong brought in a huge surplus of HK$138 billion (S$23.3 billion).
For FY 2018, Singapore's estimated expenditure is $80.02 billion and estimated revenue is $72.68 billion. A Budget deficit of $7.34 billion may appear. However, the realised revenue usually exceeds its planned figure, and so the planned deficit will likely become a surplus.
The accumulated surpluses over the years have been transferred to Singapore's national reserves. Similarly, Hong Kong's annual surpluses have been transferred to its reserves, and the estimated reserves will amount to HK$1.092 trillion by the end of this month, which is equivalent to S$184 billion.
Hong Kong's estimated expenditure in FY 2018 is HK$557.9 billion, which is equivalent to S$94 billion, versus Singapore's planned expenditure of $80.02 billion. Its main items, in ranking order, are education, social welfare, infrastructure, health and security. In comparison, Singapore's main expenditure items are defence, transport, education, health and home affairs.
Hong Kong's estimated revenue is HK$604.5 billion, which is equivalent to S$102 billion, versus Singapore's revenue of $72.68 billion.
One reason for Hong Kong's significantly higher revenue is that its Budget includes revenue from land sales, while Singapore's does not. In Singapore, proceeds from land sales do not go into annual Budget revenue, but form part of the reserves. A portion of investment income from these reserves is available to be used in the national Budget each year.
Singapore's approach to budgeting may be considered too conservative, but given the twin challenges of maintaining fiscal sustainability and staying tax competitive in the midst of an ageing population, it is probably prudent to continue to be fiscally conservative.
While Budget 2018 continues to adhere to a philosophy of fiscal prudence and sustainability, it also raises Singaporeans' awareness of upcoming higher future spending on health, housing and infrastructure and warning Singaporeans of an upcoming GST hike - at least three years ahead, yet another "Singapore way".
Professor Chia Ngee Choon is deputy head, department of economics, National University of Singapore (NUS). She is the director of Scape (Singapore Centre of Applied and Policy Economics) and co-director of the Next Age Institute at NUS.
Singapore and Hong Kong: Two forward-looking Budgets with a difference
Singapore raised taxes, while Hong Kong did not. Without an ah ye (grandfather) to lean on, sovereign Singapore has to pay its own way in the world, such as in defence and foreign affairs.
By Ker Sin Tze For The Straits Times, 7 Mar 2018
Singapore unveiled its Budget on Feb 19, and Hong Kong tabled its Budget for debate on Feb 28.
Their economies are similar in terms of size, growth rate and structure. Both economies have gross domestic product (GDP) of about US$300 billion (S$396 billion), and growth rates are 3.6 per cent for Singapore and 3.8 per cent for Hong Kong for the financial year 2017-18 (FY 2017). The services industry accounts for 70 per cent of GDP in both cities.
The two Budgets both generated surpluses. In FY 2017, the Singapore Budget produced a surplus of $9.61 billion, while Hong Kong brought in a huge surplus of HK$138 billion (S$23.3 billion).
For FY 2018, Singapore's estimated expenditure is $80.02 billion and estimated revenue is $72.68 billion. A Budget deficit of $7.34 billion may appear. However, the realised revenue usually exceeds its planned figure, and so the planned deficit will likely become a surplus.
The accumulated surpluses over the years have been transferred to Singapore's national reserves. Similarly, Hong Kong's annual surpluses have been transferred to its reserves, and the estimated reserves will amount to HK$1.092 trillion by the end of this month, which is equivalent to S$184 billion.
Hong Kong's estimated expenditure in FY 2018 is HK$557.9 billion, which is equivalent to S$94 billion, versus Singapore's planned expenditure of $80.02 billion. Its main items, in ranking order, are education, social welfare, infrastructure, health and security. In comparison, Singapore's main expenditure items are defence, transport, education, health and home affairs.
Hong Kong's estimated revenue is HK$604.5 billion, which is equivalent to S$102 billion, versus Singapore's revenue of $72.68 billion.
One reason for Hong Kong's significantly higher revenue is that its Budget includes revenue from land sales, while Singapore's does not. In Singapore, proceeds from land sales do not go into annual Budget revenue, but form part of the reserves. A portion of investment income from these reserves is available to be used in the national Budget each year.
Hong Kong's main revenue items are profits tax, land premium, stamp duties, salaries tax and investment income, out of which land premium accounts for 20 per cent of the total revenue. Profits tax refers to corporate income tax, while land premiums include proceeds from land sales and lease extensions.
In Singapore, the main revenue items are corporate income tax, personal income tax, and goods and services tax (GST). The Government announced in the FY 2018 Budget that it will raise tobacco excise duty, property buyer's stamp duty, foreign maid levy and airport tax. A carbon tax will be imposed from 2019, and GST will be raised from 7 per cent to 9 per cent between 2021 and 2025.
In Singapore, the main revenue items are corporate income tax, personal income tax, and goods and services tax (GST). The Government announced in the FY 2018 Budget that it will raise tobacco excise duty, property buyer's stamp duty, foreign maid levy and airport tax. A carbon tax will be imposed from 2019, and GST will be raised from 7 per cent to 9 per cent between 2021 and 2025.
But the Budget also increases transfers to individuals, such as giving citizens an SG Bonus of $100 to $300, housing grants, and rebates for service and conservancy charges. The Government also continues the Wage Credit Scheme and grants to help small and medium-sized enterprises to upgrade production technology and skills.
In FY 2017, Hong Kong had a huge surplus. By a local expression, the coffers are heavily flooded with money. About 40 per cent of the surplus will be used for relief benefits to the community, and the rest will be added to Hong Kong's fiscal reserves. In FY 2018, the government will reduce profits tax, salaries tax, waive property tax for one year, and increase social security payments to the needy. All these will amount to HK$50 billion. The government will also spend another HK$50 billion to promote innovation and technology development, with the aim to diversify the economy and upgrade its productive capability in future.
HK BUDGET CHANGES
There are two breakaways from previous Budgets in Hong Kong.
HK BUDGET CHANGES
There are two breakaways from previous Budgets in Hong Kong.
First, the present government has moved away from the policy of capping public spending at not more than 20 per cent of GDP. Financial Secretary Paul Chan wants to be "more proactive in managing public finances in the face of various financial needs of society and the economy".
Second, unlike in the past, the government is no longer giving cash handouts for all. Relief measures have to be more specific in helping the low-income group and the poor.
In this regard, recipients of Comprehensive Social Security Assistance, Old Age Allowance and Disability Allowance will get two extra months' pay this year. And poor students will get a cash handout of HK$2,000 each.
Both the Budgets of Singapore and Hong Kong have generated surpluses, and they plan and invest heavily for the future. Both also face ageing populations.
DIFFERENT APPROACHES
However, there are also some major differences. First, Singapore raises taxes, fees, duties and levies to strengthen revenue sources despite its huge surpluses and reserves over the years.
DIFFERENT APPROACHES
However, there are also some major differences. First, Singapore raises taxes, fees, duties and levies to strengthen revenue sources despite its huge surpluses and reserves over the years.
In contrast, Hong Kong does not raise taxes and duties in the current Budget. In fact, it lowers and waives taxes to reduce taxpayers' burden.
Singapore's rationale in raising taxes is that Singaporeans have to pay for better security and infrastructure, which future generations can enjoy. There is good logic in this consideration as the current generation enjoys what the earlier generations have built and provided. But there should also be a certain limit and fair balance on the bearing of costs and sharing of benefits between the present and future generations. The present generation should not be overtaxed to an extent that it has to tighten its belt so much for future generations.
Second, a surprising move in the Singapore Budget is to give the SG Bonus of $100 to $300 to Singaporeans aged 21 and above. Hong Kong and Macau had provided cash handouts to their residents in the last few years. But Hong Kong has decided to stop giving cash handouts this year and this has caused general unhappiness. The reason for discontinuing it is that handouts for all only instil a short-lived feel-good sentiment.
The Singapore people will probably feel the same way when they receive the SG Bonus. As the amount is small, the feel-good sentiment would be less, and they may ask for more in future. Once people take it for granted and expect it to continue, it will be difficult to scrap without causing general unhappiness, which defeats its original objective of making people happy.
Although Singapore and Hong Kong are like twin brothers, their development paths are different.
Singapore's rationale in raising taxes is that Singaporeans have to pay for better security and infrastructure, which future generations can enjoy. There is good logic in this consideration as the current generation enjoys what the earlier generations have built and provided. But there should also be a certain limit and fair balance on the bearing of costs and sharing of benefits between the present and future generations. The present generation should not be overtaxed to an extent that it has to tighten its belt so much for future generations.
Second, a surprising move in the Singapore Budget is to give the SG Bonus of $100 to $300 to Singaporeans aged 21 and above. Hong Kong and Macau had provided cash handouts to their residents in the last few years. But Hong Kong has decided to stop giving cash handouts this year and this has caused general unhappiness. The reason for discontinuing it is that handouts for all only instil a short-lived feel-good sentiment.
The Singapore people will probably feel the same way when they receive the SG Bonus. As the amount is small, the feel-good sentiment would be less, and they may ask for more in future. Once people take it for granted and expect it to continue, it will be difficult to scrap without causing general unhappiness, which defeats its original objective of making people happy.
Although Singapore and Hong Kong are like twin brothers, their development paths are different.
Hong Kong is part of China, which provides its defence and handles its foreign affairs. Singapore is a sovereign nation that pays for its own defence and conducts its foreign affairs.
Without an ah ye (grandfather) as kao shan (literal meaning: mountain to lean on, or patron), it has to be prudent in its budgeting to plan for the future.
The priorities in their Budgets must therefore be different. In spite of the difference, they both invest and spend for the future as both are forward-looking in an ever-changing world.
The writer was a Member of Parliament in Singapore from 1991 to 2001 and a Minister of State, and was consul-general at the Singapore consulate in Hong Kong from 2008 to 2012. He is now Adjunct Professor, Lee Kuan Yew School of Public Policy, National University of Singapore.
The writer was a Member of Parliament in Singapore from 1991 to 2001 and a Minister of State, and was consul-general at the Singapore consulate in Hong Kong from 2008 to 2012. He is now Adjunct Professor, Lee Kuan Yew School of Public Policy, National University of Singapore.
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